Makers in China Aware Innovation in Auto Parts is Key to Sustainability

Customs statistics reveal that China exported more auto parts than it imported in 2007, with outward shipments totaling US$12.2 billion and purchases amounting to US$10.6 billion. This performance reflects China's emergence as one of the world's top exporters of auto parts-and as a major recipient of investment in auto-parts manufacturing.

China currently has around 5,000 manufacturers that turn out approximately US$80 billion worth of auto parts annually. The manufacturers have, after years of development, achieved ample economies of scale.

After making that achievement, some of the manufacturers have become aware of the need to upgrade to high-end production and the importance of developing advanced auto parts and components such as high-performance engines, automatic transmissions, auto electronics, and fuel-saving hybrid engines. As a result, Chinese-made auto parts are growing in popularity with foreign buyers.

Auto-parts clusters have formed around auto-manufacturing facilities in six regions of China: Beijing-Tianjin, Northeast China, Central China, Southwest China, the Yangtze River Delta, and the Pearl River Delta. These clusters enable makers of parts and complete automobiles to achieve vertical and horizontal supply-chain integration, and to improve their production efficiency and innovation.

Following China's move to liberalize shareholding by foreign investors, 70% of the world's big automakers have moved in to take advantage of China's low land and labor costs, setting up more than 1,200 wholly owned and joint-venture companies there, according to statistics published by the China Association of Automobile Manufacturers.

These foreign-invested companies have used their abundant capital and superior production technology to outdo their local counterparts in terms of exports. Statistics show that exports of low-end auto parts from China grew faster (by 13 percentage points) for foreign-invested manufacturers than for local suppliers last year; for high-end auto parts, the gap was 21 percentage points. This strong competition is having a needed effect on domestic producers by forcing them to adopt a longer view and concentrate more on new technology and innovation.

Several government agencies, including the National Development and Reform Commission, Ministry of Science and Technology, and China Customs, have recently passed measures to encourage car and parts makers to focus on exports. Since 2006 the government has also approved 12 cities as national export bases for cars and parts, including Changchun, Tianjin, Shanghai, Chongqing, Xiamen, Wuhan, Taizhou, and Wuhu. The central government is helping local officials in these cities to beef up their infrastructure and thus create a better environment for manufacturers.

One result of these incentives and efforts has been a rapid surge in auto-parts exports (mostly of low-end products) over the past few years. Local makers are not yet able to compete with their foreign rivals in the high-end sector of the market, and they are currently struggling with the continuous appreciation of China's renminbi (RMB) currency and with soaring raw materials prices. To overcome these difficulties, some Chinese auto-parts makers are stepping up their effort to develop, produce, and market high-end parts that will give them a stronger position in the global market.